A New Face of Russia – A New Face of Energy

By
David J. O'Reilly, Chairman and CEOChevronTexaco Corporation

U.S.-Russia Commercial Energy Summit

St. Petersburg, Russia, September 22, 2003

Let me begin by commending the Russian and American governments and Presidents Putin and Bush for convening this second commercial energy summit in the historic city of St. Petersburg. Following the first summit last year in Houston [Texas], this assembly of private and public sector leaders of our two countries provides an extraordinary opportunity for the common cause of energy and free market development.

Joining me here is our executive vice president for Business Development, Sam Laidlaw. We and our colleagues from ChevronTexaco look forward to meeting with our Russian and American friends and to discussing the opportunities as well as the challenges for future partnership.

I would like to address first the opportunities, because I believe that, in important ways, we see emerging today a new face of Russia and a new face of energy.

Just as Russia turned a new face to the world in St. Petersburg three centuries ago, so does it here today. The new face is defined by a period of unprecedented economic growth since the rebirth of the Russian state, and the engine of that growth is energy.

Over the past three years - and for the first time in over a decade since independence - the Russian Federation has achieved real growth, amounting to 20 percent in its gross domestic product. The Federation is running substantial budget and current account surpluses and is repaying its foreign debts ahead of schedule. Its reserves have surged to over $60 billion. The renewal of the Russian energy sector is a major reason for this accomplishment.

Leading Russian companies, such as Gazprom, LUKOIL and Yukos-Sibneft deserve great credit for their accomplishments and now are joining the ranks of the world's major national and international oil companies.

These companies are a cornerstone of the Russian economic revival. Their success is driven not only by their size but by their increased efficiencies and greater transparency, which are clearly recognized in the marketplace.

Russian oil and gas production and exports now rival those of Saudi Arabia, and they have propelled the Russian economy.

Under the national energy strategy announced this year, Russian oil production, already at 8.5 million barrels per day could grow to over 10 million barrels per day by 2020, and Russian gas exports could grow from 185 billion cubic meters in 2002 to over 230 or even over 240 billion cubic meters by 2020.

Our Russian friends would be the first to say that much more needs to be done, but by any measure these are major achievements. If America's legendary Rip Van Winkle were to have fallen asleep following the 1998 economic collapse and he were to awaken today, he would be amazed. He would not recognize the commercial vitality here in St. Petersburg, in Moscow or in other major cities.

Of course there is still much to accomplish. Too many have not yet seen the direct benefits of economic growth. President Putin recognized this with commendable frankness in his last two State of the Federation addresses. He underlined the need for greater reform to reduce state interference, uphold the rule of law, create an investment-friendly environment and integrate into the global economy.

We should all applaud President Putin's goal of at least doubling the nation's gross domestic product in a decade. And we can all support fully his vision of Russia as "a country with a competitive market economy, a country where property rights are securely protected and economic freedoms allow people to work honestly and earn without fear or limit."

The president's statements have great resonance today – in Russia and around the world. The state should play a positive role by assuring equal protection of the laws and, at the same time, removing the dead weight of bureaucracy.

Public and private sectors can cooperate to promote competition, to make private capital even more productive and to assure a shared sense of social responsibility, both public and corporate. This is a daily struggle for both our countries, as Americans will certainly attest to in the wake of Enron and WorldCom. In America too, we must ensure that the balance between shareholders rights and those of society is properly reflected in our laws and in the administration of our laws.

We should applaud the growing partnership of our two governments – from the war against terrorism to the campaign for economic progress, demonstrated again this week by Secretary Evans' trade mission to Russia. Certainly, the United States can do more to help – by repealing the anachronism of Jackson-Vanik and supporting Russia's membership in the World Trade Organization, to name just two examples.

Russia and the United States can do more together – by assuring real, mutual access to our continental markets, by promoting the security and stability of world energy supplies and by making sure that contracts are respected and that all investments, including those that are large-scale and long-term, receive genuine and stable protection.

Energy investment is an excellent case in point. It is essential that investment laws are equally competitive for scarce international capital.

Energy marketing and transportation are another case in point. As our bilateral working group is making clear, our two countries have an opportunity to promote open and competitive pipelines which will reduce the cost of transportation and remove bottlenecks to increased production. Russian consumers and producers – and their foreign partners – all stand to gain from greater competition. This certainly has been our experience in America, where our independent pipeline operators have made possible some of the lowest tariffs in the world.

Private-public sector cooperation and adherence to existing agreements have made all the difference not only in creating but in expanding the Caspian Pipeline Consortium (CPC) pipeline. So too private-public sector cooperation and contract compliance can make the same difference in creating a new pipeline to Murmansk and in exporting Russian oil to the United States.

These shared challenges and shared opportunities apply just as much to the private energy companies of our two countries. At ChevronTexaco, we have embraced opportunities in this region by two of the largest foreign investments - in the Tengiz Field, Kazakhstan and in Russia, through the Caspian Pipeline Consortium. We welcome the fact that other Western companies are also making large investment commitments.

Now, major Russian companies are embracing the opportunity to move onto the world stage and to become truly world-class. We have already seen the first steps, for example in Yukos and LUKOIL's downstream investments in Europe and the United States. At ChevronTexaco, we are proud that LUKOIL is our partner in both Kazakhstan and CPC and that Sibneft is our partner in a new international consortium.

But we see this only as the beginning. Why not work together in other regions as well, such as Asia, the Americas and Africa? Certainly, Sakhalin – where we also are investors – offers the potential of exporting gas not only to East Asia but the U.S. West Coast, and in the longer term. So do the great oil and gas reserves of eastern Siberia.

We Americans and Russians find ourselves at a turning point. We can view Russian entry into the world energy markets and Western entry into the Russian energy markets a challenge or even a threat. Or we can view this Russian and this Western entry as an opportunity for real partnership.

If we decide this entry is a challenge or a threat, we will seek to contain and blunt it and to extract short-term advantages out of any deal we make. That is a dead end, discredited in previous decades, and will be value-destroying for both sides.

If we decide this entry is an opportunity for partnership, we will seek to build bridges of energy cooperation and to enhance value in both the short and long terms – working together in both Russian and global markets.

Partnership is our choice at ChevronTexaco. We aspire to be the partner of choice worldwide and most particularly here in Russia and Eurasia. Global partnership can be the choice of our two industries, as I believe it is the strategic choice of our two presidents and governments.

Three centuries ago, Tsar Peter the First confronted his inward-looking boyars and became Peter the Great by insisting on a historic opening to the West. He was truly a giant, in both the physical and historical sense. Here in the magnificent city he created, we have the opportunity to follow in this giant's footsteps by opening to and partnering with each other across national and regional boundaries alike.